The General contractor has developed basic formats and systems for the preparation and control of the various approval documents. These formats and systems will be used unless authorization for a variance has been received from the Regional Senior Engineer.
Definition of an Approval Letter
An Approval Letter or A-Letter, is a letter requesting the approval of the Architect and/or the Owner for anything which must be approved, PROVIDED THAT IT DOES NOT CHANGE THE TERMS OR AMOUNT OF general contractor’S CONTRACT. Such items might include, but are not limited to, the following:
Lists of bidders when formal approval is necessary.
Awards of Subcontracts; Subcontract Change Orders within the Contract scope; Material Orders, Reductions in Reserve; Final Payment, etc.
Materials, details, catalog numbers or names, etc., not affecting the General Contract price, and not covered by approval samples, drawings, brochures, etc., or by a General Contract Change Order. Do not duplicate approvals.
Approval of a dollar amount the Owner is willing to commit (for, as an example, to get structural steel shop drawings started) prior to the formal signing of a GMP.
Establishing the billing rates for general contractor Staff.
The General Contract quite often sets a dollar limit on the amount of money TCCo is authorized to spend without obtaining approval, but under certain conditions it might be advantageous to submit Approval Letters for any expenditure reasonably approaching the contract approval minimum, particularly where a profit sharing arrangement between TCCo, and the Owner exists. The Project Engineer should consult with the Project Executive as to whether these letters are to be written.
Final Payment Approval Letters should be used for acceptance of a subcontractor’s work prior to authorizing final payment to them. Final Payment A-Letters should also be used to establish the Architect and Owner’s approval of the final subcontractor amount under Guaranteed Total and Cost Plus contracts.
Rules of Approval Letters
Approval Letters are usually prepared by and should be signed by the TCCo. Project Engineer. They must be as clear and concise as possible. A-Letters should be written in accordance with the following rules:
1. Limit the letter to two pages if at all possible. When spread sheets, bid prices, or special conditions of bids must be explained, use attachment sheets so that the body of the letter is short. Each page of the letter must include the Contract Number, A-Letter numbers date and page number when there is more than one page.
2. State clearly what the approval cover. That is, the scope of the work, the name of the subcontractor to whom a contract is to be awarded, and its amount. This paragraph, or a summary of it, must always be on the page containing the signatures. There must never be a page containing only signatures.
3. Make recommendations clear and unequivocal.
4. Whenever there is doubt as to whom the contract should be awarded to, or if alternates or conditions are to be accepted or rejected, provide properly worded spaces in the approval boxes so that decisions may be entered by the approving parties.
5. Place the boxes for approval below the signature of the Project Engineer. Type the names of the firms requiring signature so there can be no doubt as to where they sign. All boxes should be headed “Recommended” except the one with the final approval signature – usually that of the Owner – which should be headed “Approved”.
6. If it is necessary to revise and Approval Letter after it has been issued, the revised letter should bear the same “A” number with “R-1”, “R-2” etc., to indicate the number of the revisions (A-36, R-1). If additional information must be transmitted after the issuance of an A-Letter, write a Supplement bearing the number of the A-Letter with “S-1”, “S-2”, etc. (A-36, S-1). No approval boxes are used on Supplement letters.
See Attachments on the following pages.
The Contract between general contractor and the Owner establishes the approval criteria. The level of approval required depends on the type of contract and more specifically what is written in your particular contract.
After you have reviewed the contract and if you find it is not specific regarding the approval process, a meeting must be held with the Owner to develop a project specific process. Be sure to record and distribute minutes of that meeting. From that point forward, any changes in the process or persons named as authorized representatives must be confirmed in writing.
Set up an Approval Letter log and establish a procedure with the Architect and Owner for handling Approval Letters authorizing commitment of funds, subcontract bid lists etc. as required by the Contract Documents. Coordinate requirements for back up (copies of bids, quotation sheets, etc.) with the Purchasing Agent.
Types of Approval Letters:
a. Bidders Lists
b. Contract Award
c. Approval to Expend Funds
d. Retainage Reduction
e. Use of Contingency
g. Final Subcontractor Payment
The Contract may have a provision that allows the Owner the right of approval to any Bidders for a particular trade. If the bids are publicly opened and no scope review is allowed then an Approval Letter is not required.
The Approval Letter for Bidders should be submitted as soon as possible after the contract between the Owner and general contractor is signed. The Purchasing Department generates the list with input from Operations. In some cases the contract may require that the bid list be reviewed by a specific consultant; i.e. the Mechanical Engineer will review the proposed HVAC contractors. If there is no contract requirement it is recommended to get approval on complex projects to ensure that the Subcontractor is not criticized later. The protocol should be established at the first OAT meeting or sooner.
Formal authorization is required for general contractor to award a subcontract on Cost Plus and GMP type Contracts. This is accomplished by submitting a Contract Award Approval Letter. The Letter should include the following items:
1. Full name of Subcontractor.
2. Dollar value of the contract.
3. Dollar value of the line item in the estimate or GMP.
4. Any specific allowances for materials i.e. an allowance of $30/sq. yd. carpet. If the Allowance is made up of many trades, a separate sheet is to be included that provides a running comparison between the estimate side of the allowance and the actual costs.
5. Any special scheduling requirements. Examples:
Overtime for utility connections are included.
6. Contract alternates that require approval. Include a separate area for the approval signatures for each alternate.
A Budget Analysis is attached to indicate how the bid relates to the specific line item in the estimate or GMP. This analysis will indicate the following items:
• Dollar value of any items not included in the line item and any specific “HOLDS”. Examples:
The exterior brick paving is not included.
Funding transferred from this line item to another or this subcontract included more than one line item. Example:
The Subcontract for Structural Steel includes the steel stairs, which was a separate line item.
Approval to Expend Funds
Often formal authorization is required from the Owner for general contractor to expend any funds to a subcontractor on Cost Plus and GMP type Contracts. The original estimate included funding to cover these items and in no way is the scope of the project increased or decreased. An example of where this is required is for items that are included in the GMP but are not purchases at the time of bidding as specific trade. In addition, major General Condition items i.e. trailers, computers, etc. sometimes require the submission of an Approval Letter.
In almost all contracts and subcontracts there is a clause that states that a specific percentage of each monthly application will be withheld by the Owner. This is called Retainage and in most contracts it starts at 10 percent. For example, if a subcontractor submits a bill for $100,000 for the work completed in a given month, they can expect to be paid $90,000.
If the Subcontract value is substantial then the amount of retainage withheld can become significant after a number of months. Since the risk of the lack of performance by the subcontractor is reduced as the project nears completion, it is often justified to reduce the amount of retainage being withheld.
An Approval Letter is general contractor’s formal request to reduce either our reserve or a subcontractor’s reserve from 10% to a lesser percentage or to a lump sum amount. On large contract this is a multi-step process; i.e. the reserve is lowered to 5%, then to 2 ½ % and finally to a lump sum. Review your contract and the qualifications to the GMP, to determine if there is a clause that allows for a reduction in the retainage being held on most applications. In many contracts there is a clause that states when 50% of the work has been completed the retainage can be reduced from 10% to 5% or at 50% completion there will be no future retainage withheld. If your contract contains this clause then formal approval is required to initiate the reduction. The decision of whether or not to reduce a subcontractor’s retainage should be based on the performance of the subcontractor. All of the appropriate paperwork (waiver of liens, consent of surety etc.) is still required from accounting after approval is received from the Owner. The status of items (as-builts, attic stock, city approvals, and documentation) required for closeouts must be reviewed before the contract reserve is lowered.
If the Subcontractor is bonded, review the Bonding Company notification requirements with the Project Purchasing Agent. A Consent of Surety must be obtained prior to reducing a bonded subcontractor’s retainage. The Consent of Surety forms are given to the Subcontractor who fills them out and forwards the forms to their bonding company who signs and seals the Consent of Surety and sends them back. Often a different numbering convention such as “RR” instead of “AL” is used to distinguish these Approval Letters.
Use of Contingency
Formal authorization is required from the Owner for general contractor to expend any Job Contingency funds on GMP and Cost Plus type Contracts. In many cases this is a TWO stage procedure and will require TWO Approval Letters because the final cost is not know. The first Approval Letter requests authorization to perform the work for an approximate amount and the second indicates the final actual value and requests approval to issue change orders to Subcontractors. The letter is to clearly detail the reasons why the funds are being requested. The letter includes a summary of contingency dollars spent to date and the amount remaining.
When a GMP is being developed and an item or area is not known or specified an allowance is established for that item. Allowances can be grouped into TWO categories; the first type is for a specific element (i.e. carpet, stone, hardware) and the second type would be for specified areas (i.e. landscaping, lobbies or kitchen area). In many cases the Architect instructs general contractor to include an allowance in our estimate or bid. To help track these allowances and because each Allowance eventually must be closed out, immediately assign a Change number to each allowance so that it will appear in the Change Log. Examples of the two types of allowances are as follows:
The Architect includes an Allowance of $32 per square yard to furnish and install the carpeting in the employees’ lounge.
Note: The key words are furnish and install. In some cases the allowance may be for the carpet material only and the labor to install would be included in the GMP. If the instructions read “Included an Allowance $32 per square yard for carpeting in the employees’ lounge,” this is too vague and must be further defined.
The lobby is not designed; an allowance is established based on a whole series of assumptions with input form the Architect and Owner as to what type of finishes are on the floors, walls and ceiling and what is required mechanically and electrically.
This category of Allowances carries far greater risk and should only be used as a last resort. It is far broader and would apply to specific areas: lobbies, kitchens, meeting rooms and in some cases exterior landscaping. This allowance must be fully detailed as to what is included and the assumptions made.
Final Payment to Subcontractors
This letter indicates that the Owner has accepted the work. It also indicates that the Owner is satisfied with the punchlist, attic stock, as-builts, manuals and training requirements. Review the Bonding Company notification requirements with the Project Purchasing Agent. If the contractor is bonded, the Bonding Company must be notified and return a properly signed Consent of Surety in effect approving that subcontractor’s Final Payments. When a Consent of Surety is required, send the form to the Subcontractor, and have the Subcontractor make the contact with the Surety. If for some reason general contractor must contact the Surety, the contact must be made either by the Purchasing Agent, or by the Project Executive.